Visa Sued by US in Antitrust Case Over Debit Card Markets (2)

The US Justice Department sued Visa Inc., alleging the global payments giant illegally monopolized the debit card market, in the Biden administration’s first major antitrust case in the financial services industry.

Antitrust enforcers alleged in a complaint filed in Manhattan federal court Tuesday that Visa, which handles more than 60% of the more than $4 trillion in US debit transactions each year, entered into a series of agreements penalizing merchants who sought to use alternatives and paid potential rivals to stay out of the market.

Garland speaks at the Department of Justice on Sept. 24.

Photographer: Al Drago/Bloomberg

“Visa’s unlawful conduct affects not just the price of one thing but the price of everything,” Attorney General Merrick Garland told reporters in Washington in announcing the lawsuit. “Visa is charging a hidden toll on each of trillions of transactions.”

Visa is the largest of the payment networks in the US and collects some $7 billion in yearly fees on both debit transactions and so-called “card not present” transactions where customers use their debit card number online or in apps, according to the complaint.

In its agreements with merchants, the Justice Department said, Visa imposed an anticompetitive pricing structure that essentially forced them to route all debit transactions through its network or face stiff penalties. Visa also entered into agreements with technology companies including PayPal Holdings Inc., Apple Inc. and Block Inc., which were developing products that would have challenged its stranglehold over payment networks, paying them hundreds of millions of dollars to stay out of the market, the agency said.

Visa shares were down 5.4% to $273.09 at 3:55 p.m. in New York.

“Anyone who has bought something online, or checked out at a store, knows there is an ever-expanding universe of companies offering new ways to pay for goods and services,” Julie Rottenberg, Visa’s general counsel, said in an emailed statement. “Today’s lawsuit ignores the reality that Visa is just one of many competitors in a debit space that is growing, with entrants who are thriving.”

The case opens up a new front in the Biden administration’s antitrust crackdown after actions focused on Big Tech, airlines and retail, among other industries, with mixed results.

After Visa, the most prominent US debit networks are run by Mastercard Inc. and Discover Financial Services, though others include Fidelity National Information Services Inc.’s NYCE, Fiserv Inc.’s STAR and Accel.

Dodd-Frank Act

The Justice Department’s complaint alleges that Visa’s illegal conduct began in 2012 as a response to the Dodd-Frank Act that Congress passed in the wake of the financial crisis. The law required card issuers — which are often banks — to offer at least two independent debit networks to increase competition and to give merchants more of a choice. It also set limits on the fees that banks require retailers pay to accept debit cards, though the law didn’t cap the fees that debit networks themselves charge for processing transactions.

Concerned that the law would generate competition and harm its dominant position in the debit market, Visa began to require merchants to enter into agreements with onerous terms. The Justice Department alleged the company used “cliff pricing,” charging merchants significant fees on transactions unless they routed the vast majority of them to Visa, at which point they would get a discount. The fee structure forced merchants to send most transactions to the payments giant, effectively shutting out smaller debit networks, the complaint alleges.

Visa also sought to blunt the development of new technologies that might allow consumers to bypass its network when shopping online. The most public fight occurred with PayPal, which initially encouraged users to link their bank account to pay for items online. In a 2016 agreement, PayPal vowed to no longer encourage Visa card users to link their bank accounts to its wallets and promised to offer use of the debit cards “as a clear and equal payment option during enrollment and subsequent payments.” In exchange, Visa said it would cut some of the fees it charges PayPal.

The agreement with PayPal, which was renewed in 2022 for 10 years, requires the company to route 100% of its debit transactions through Visa’s network, the complaint says.

‘Existential Threat’

Visa reached similar settlements regarding Apple Pay, the digital wallet it introduced on iPhones in 2014 that allows use of debit and credit cards for mobile payments. It had a similar agreement with Block, the fintech company formerly known as Square, which also runs consumer-payments platform Cash App.

Visa viewed Apple Pay as an “existential threat” and entered an agreement in 2012 that bars the company from developing technology that would rival Visa’s debit capabilities, according to the Justice Department. In exchange, the complaint alleges, Visa pays Apple hundreds of millions of dollar each year.

The payments firm was concerned when Block launched its Cash App product that consumers might begin to use it in lieu of debit cards, so the companies entered an agreement in 2014 with a debit routing commitment, the US alleged. When Block introduced a new feature in Cash App in 2016 that would allow consumers to store money within their account, Visa threatened to terminate its agreement and the company removed the feature, the complaint said. Last year, the companies signed a new deal that would see Block send 97% of its transactions through Visa.

Yearslong Probe

The Justice Department lawsuit is the culmination of a yearslong probe of Visa’s business practices born out of the firm’s failed acquisition of the financial-technology infrastructure firm Plaid Inc. in 2021. It is also the latest in which antitrust enforcers allege a dominant firm used restrictive contracts to stifle innovation.

Representatives from Block and Apple didn’t immediately respond to requests for comment. Plaid and PayPal declined to comment.

Last month, a Washington federal judge found that Alphabet Inc.’s Google violated antitrust laws by paying $26 billion to companies to ensure its search engine was the default option on smartphones and web browsers. The Justice Department alleged those exclusive deals kept rival search offerings from gaining the users and data needed to grow. Likewise, the Justice Department in May sued Live Nation Entertainment Inc., alleging that its ticketing arm Ticketmaster used long-term exclusive contracts to lock venues into using its technology.

The case is US v. Visa, 24-cv-07214, US District Court, Southern District of New York (Manhattan).

(Updates with Garland, Visa comments and more from complaint.)

To contact the reporters on this story:
Leah Nylen in Washington at lnylen2@bloomberg.net;
Paige Smith in New York at psmith494@bloomberg.net

To contact the editors responsible for this story:
Sally Bakewell at sbakewell1@bloomberg.net;
Sara Forden at sforden@bloomberg.net

Elizabeth Wasserman

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